AA08-09_Ferri_Scelte Finanziairie_Lezione 9 by chenmeixiu

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									La crisi originata dai mutui subprime
     e molto altro sull’instabilità
               finanziaria


           prof. Giovanni Ferri
    Economia delle scelte finanziarie e di
                portafoglio
                 Lezione 9
      But then came the global financial crisis
This   requires a paradigm shift
In the last 15 years the international financial system lost its sense of gravity, like
Willie Coyote … who helped it look up to the sky (and then fall)?




                                                           Qu ic kTime ™ e un
                                                           de co mpres sore
                                        so no n ece ss ari pe r v is ual i zz are qu est' im magi n e.




                                                                                                         2
       The Political Economy Cycle of Finance




                   1930s                       1970s
               Re-Regulation               De-Regulation




Great Crash                                                              1980s
   1929               Terminal part   Initial signals
                                                                    Latin American
                       of the cycle    of instability
  2007                                                                  Crises
Subprime


                1990s-2000s                     1990s
              Mega Bankruptcies            Systemic Crises
                 (LTCM, Enron, etc)           (Mexico-Asia-Japan)




                                                                               3
                             The Minsky Model: Expansion
                                                  Starting Point:
                                                                                         The Great Moderation
                                                   -Low inflation
                                                                                            (Bernanke ’04)
                                                -Low unemployment

                                                Positive Shocks:
Politicians & economists                           -deregulation
 theorize the beginning                        -Financial innovation
       of a new Era                               -Capital inflows
  (e.g. New Economy)                            -Low interest rates

Balance sheet channel                            Financial Sector:
   Lending channel                           -Rising demand for credit
 Financial accelerator                         -Risk underestimation
(Bernanke-Gertler,’95)                        -Rising supply of credit


                     Financial Markets:                                       Real Economy:
                     -Rising asset prices             -Covered              -Consumption rises
                    (shares & real estate)          -Speculative             -Investment raises
                      -Wealth increases                -Ponzi                  -Lower savings
                       -Debt increases                                 -Rising current account deficit


                                                        Boom:
      Animal spirits                            -Economy overheats                          Global Imbalances
   (Akerlof-Shiller, ’09))              -Real and/or financial imbalances grow               (Bernanke ’07)
                                         -Financial structure becomes fragile
                                                                                                          4
                    The Minsky Model: Contraction
                                       Starting Point:
                                     -Rising interest rates                       Default of Ponzi units
                                -Sudden change in expectations


                                      Negative Shocks:
                                -Capital flows away from more
                                   speculative investment


                                      Financial Sector:
                                 -Pessimistic evaluation of risk
                                   -Lower demand for credit
                                -Lower supply of credit (crunch)


         Financial Markets:                                              Real Economy:
       -Lowering asset prices           -Central Bank                  -Lower consumption
          -Lowering wealth              -Government                     -Lower investment
           -Debt deflation               -Regulation                      -Rising savings
        -Real debt increases                                       -Lower current account deficit



   Debt Spiral                             Burst:
                                  -Banking crisis (bank runs)                      Deflationary Spiral
a la Fisher 1933
                                         -Recession
                                                                                                    5
                    Market Liquidity & Funding Liquidity
      Two spirals amplify subprime related losses.


                                        Lower
                                       positions


      Initial losses       Funding                       Prices diverge
(e.g. mortgage default)    problems                   from fundamentals

                                        Higher
                                        margins

                                        Larger
                                        losses




                                                                          6
Il credit channel nella crisi sub-prime - 1

CAUSE MACRO DELLA CRISI: 1-BALANCE SHEET CHANNEL
Greenspan + afflusso di capitali dall’Asia = riduzione dei
   tassi d’interesse  abbondante liquidità sul mercato.
                                         The Greenspan Fed
      9                                                                                     9

      8                                                                                     8

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      5                                                                                     5

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      3                                                                                     3

      2                                                                                     2

      1                                                                                     1

      0                                                                                     0
            1999           2000           2001             2002   2003         2004
          FEDERAL FUNDS TARGET RATE (EP) : United States
          US CONVENTIONAL FIXED MORTGAGES
                                                                         Source: Thomson Datastream
                                                                                                      7
Il credit channel nella crisi sub-prime - 2

CAUSE MACRO DELLA CRISI: 1-BALANCE SHEET CHANNEL
Il costo dei mutui diminuisce e la domanda di case aumenta
Esuberanza irrazionale: in 5 anni prezzo case raddoppia!
                                  CASE-SHILLER COMPOSITE
    220                                                                                               220


    200                                                                                               200


    180                                                                                               180


    160                                                                                               160


    140                                                                                               140


    120                                                                                               120


    100                                                                                               100


     80                                                                                               80
          1999    2000     2001     2002     2003     2004     2005    2006        2007 2008
          S&P/CASE-SHILLER HOME PRICE INDEX - 20-CITY COMPOSITE : United States
                                                                                  Source: T homson Datastream
                                                                                                                8
            Il credit channel nella crisi sub-prime - 3
            CAUSE MACRO DELLA CRISI: 2-BANK LENDING CHANNEL

                           I mutui Usa dalle
                           banche al mercato




     Il processo di
     disintermediazione
TABELLA XX
Emissioni e cartolarizzazioni di mutui in Usa dal 2001 al 2006

               Subprime                           Alt-A                        Jumbo                           Agency
                Cartolariz-                      Cartolariz-                   Cartolariz-                     Cartolariz-
Anno Emissioni              Ratio      Emissioni             Ratio   Emissioni             Ratio   Emissioni               Ratio
                 zazioni                          zazioni                       zazioni                         zazioni
2001  $190,00     $87,10    46%         $60,00     $11,40    19%      $430,00   $142,20    33%     $1.433,00   $1.087,00   76%
2002  $231,00    $122,70    53%         $68,00     $53,50    79%      $576,00   $171,50    30%     $1.898,00   $1.442,60   76%
2003  $335,00    $195,00    58%         $85,00     $74,10    87%      $655,00   $237,50    36%     $2.690,00   $2.130,90   79%
2004  $540,00    $362,63    67%         $200,00   $158,60    79%      $515,00   $233,40    45%     $1.345,00   $1.018,60   76%
2005  $625,00    $465,00    74%         $380,00   $332,30    87%      $570,00   $280,70    49%     $1.180,00    $964,80    82%
2006  $600,00    $448,60    75%         $400,00   $365,70    91%      $480,00   $219,00    46%     $1.040,00    $904,60    87%
                                                                                                                           9
Fonte: Ashcraft A. and T. Schuermann (2007)
   Il credit channel nella crisi sub-prime - 4
   CAUSE MACRO DELLA CRISI: 2-BANK LENDING CHANNEL
   Fragilità delle
   investment banks:
   25% delle
   passività o/n


Perché costano
meno




                                                 10
Il credit channel nella crisi sub-prime - 5
CAUSE MACRO DELLA CRISI: 2-BALANCE SHEET CHANNEL
- le famiglie dagli standard creditizi più bassi (subprime)
  iniziano ad andare in default  i prezzi delle case
  scendono e la bolla scoppia;
- nello shadow banking system le modalità di raccolta fondi
  a breve termine si congelano
- gli spread aumentano (specie su commercial paper)

- Da 1/7 a 31/8/07 S&P riduce rating di 1544 titoli garantiti
  da mutui residenziali  crollo fiducia nei rating




                                                         11
Il credit channel nella crisi sub-prime - 6
CAUSE MACRO DELLA CRISI: 2-BALANCE SHEET CHANNEL
- dopo poco tempo anche il mercato dei CDO si congela

- le SIV, a corto di liquidità, si rivolgono alle banche



LA CRISI SUBPRIME: AGOSTO 2007
Default mutui subprime  Funding liquidity* 
 Mismatching di scadenze:

rollover risk (mercato Abcp e altri prodotti strutturati);
margin risk (primary brokers alzano margin requirements);
redemption risk (deflusso di depositi).
 Intervento delle Banche centrali (iniezioni di liquidità)

* facilità con la quale è possibile raccogliere denaro per
  l’acquisto di un’attività tramite l’emissione di obbligazioni
  garantite dall’attività stessa.


                                                           12
Il credit channel nella crisi sub-prime - 7
LA CRISI SUBPRIME: DICEMBRE 2007
Deleveraging  Market liquidity* 
 La Fed interviene con la Term Auction Facility (TAF):
  nuove linee di credito alle banche commerciali; ampia
  gamma di garanzie collaterali; no effetto stigma.
* facilità con la quale è possibile vendere un’attività senza
  che il suo prezzo subisca variazioni di rilievo.

LA CRISI SUBPRIME: MARZO 2008
 Bear Stearns rischia il fallimento

 La Fed interviene su più fronti:

- salva la banca d’affari concedendo un prestito a JP Morgan

- nuovi strumenti per fornire liquidità ai primary dealers



Perché Bear Stearns non poteva fallire? Too interconnected
  to fail
                                                         13
    Il credit channel nella crisi sub-prime - 8
LA CRISI SUBPRIME: SETTEMBRE 2008
 Il mese che ha cambiato il capitalismo Usa (e non solo):




   il fallimento di Lehman Bros. apre il vaso di Pandora
   dopo pochi giorni viene invece salvata l’assicurazione AIG
   ma forse anche Lehman era too interconnected to fail
   la crisi contagia l’Europa e il resto del mondo            14
Il credit channel nella crisi sub-prime - 9
LA CRISI SUBPRIME: IL RISCHIO DI CONTROPARTE
Quattro fasi della crisi: le banche non si prestano più …
  rischia di bloccarsi il sitema dei pagamenti
              TED SPREAD (LIBOR 3M - TBILL 3M )                                            6



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                                                                                           0
    J   F M A M      J   J   A S O N D        J   F M A M J         J   A S O N
    US EURO$ DEP. 3 MTH (BID,LDN)-US TREASURY BILL 2ND MARKET 3 MONTH (RH Scale)
                                                                                               eam
                                                                        Source: T homson Datastr
                                                                                                     15
                                International Contagion

   As months pass, contagion extends to other markets
   Emerging are initially spared but decoupling is a pious illusion

               Heat Map: developments in systemic asset classes

                                        HEAT MAP




Fonte: IMF, GFSR, Aprile 2009




                                                                       16
                           The 2009/2010 Forecast
   World Recession; less pronounced in emerging economies.




       Fonte: IMF, GFSR, Aprile 2009

                                                        17
The crises behind the crisis & destabilizing policies
   The global financial crisis triggered by the subprime is non
    the first one but (perhaps) the last in a long series of
    crises appeared from the 1980s & intensified in the 1990s
   Financial crises gradually aggravated hitting the periphery
    first and then move on to the center of the financial
    system  re-regulation is needed
   But to re-regulate well we need to understand past errors
   While conflicts of interests (a key part of the pre-crisis
    deviations of finance) will need to be addressed with some
    form of separation, three theoretical errors have made
    stabilization interventions destabilizing:
      i) erroneous risk pricing models;
      ii) wrong “evolutionary” view of the financial system;
      iii) “irresponsible” monetary policy by the Fed.




                                                               18
              1. Erroneous risk pricing models
-   The benefits offered by financial markets through diversification
    have been exaggerated by underestimating systemic risk.
-   Starting from the base model - e.s. the Capital Asset Pricing
    Model - the assumption is made that sovereign risk is
    uncorrelated (orthogonal) to private risks.
-   Through this it is possible deriving the CAPM fundamental
    formula:

                ERi = r + βi(ERm – r)

    where ERi is the equilibrium expected return on risky asset i, r is
    the risk free rate (approximated by the return on government
    securities), ERm is the equilibrium expected return on the
    diversified portfolio and βi = cov(Ri , Rm)/var(Rm).

-   The fallacy of this assumption of orthogonality of risks has
    become evident when governments had to intervene to salvage
    the banks in danger: the spreads on bank CDS lowered while
    those on sovereign CDS raised (following fig. 1)  risk pricing
    models need be revised.
                                                                    19
          1. Erroneous risk pricing models

                           The financial-sovereign spread
Ballooning sovereign CDS   visibly lowers after Lehman




                                                    20
      2. Wrong “evolutionary” view of the financial system
   The evolutionary view postulated that financial markets
    be more efficient than banks at managing risks, so
    that banks should move from the old model (lend & keep
    the loans, OTH) to the new model (lend & sell the loans, via
    securitization, OTD).

   Banks’ role as certifiers of loan quality was neglected but
    that role was there only with OTH not with OTD  granting
    loans to sell them rather then to keep them endangered
    banks’ incentives to perform in depth screening &
    monitoring of the borrowers, so that lending standards
    rapidly deteriorated.

   And the evaluation of the creditworthiness of the loans
    underlying securitizations fell back on the rating agencies
    who founded such evaluation on past historical default
    rates, but these were based on OTH and, thus, the
    agencies systematically gave overly optimistic
    ratings.
                                                             21
Il credit channel nella crisi sub-prime - 10
    LE CAUSE MICRO: MORAL HAZARD & ADVERSE SELECTION

    Da “originate to hold” a “originate to distribute”



             debt              debt          debt
Famiglie –          Mortgage
                     Banche            SIV          Investitori
 Imprese            Brokers
              $                $             $

        Screening                            Agenzie di rating
                           True Sale
        Monitoring

                                                              22
        2. Wrong “evolutionary” view of the financial system

   For too long we had a “crossed-eye” theory of finance:
       Market theory based on complete markets & perfect
        information;
       Financial intermediary theory based on asymmetric
        information & delegated monitoring.


   When, with liberalization, financial markets became
    dominating banks’ practice and even regulatory principles
    (e.g. IAS, Basel 2) moved toward financial market type
    activities while weakening banks’ credit function  we
    applied to banks the theory which if adequate to financial
    markets is inappropriate to banks

   It’s wrong subordinating banks to financial markets (and also
    the opposite would be a mistake)  we need to build on the
    banks-markets complementarity (Allen & Gale, 2000).

                                                               23
3. “Irresponsible” monetary policy by the Fed
 -   The mix became explosive when the two previous mistakes –
     making lenders irresponsible – were compounded with the third: a
     monetary policy focused only on consumer price inflation which
     systematically ignored the enormous global imbalances that
     were cumulating: the US current account deficit rose from 1.5%
     of GDP in 1995 to beyond 6% in 2005-06.
 -   As a counterpart of the external imbalance US households
     took on excessive debt – rising from 71% of GDP in 2000 to
     100% in 2007 – mostly against real estate (betting on its
     continuous appreciation) something that became a nightmare
     when house prices started falling.
                                         US DOLLAR REAL EFFECTIVE EXCHANGE RATE AND CURRENT ACCOUNT DEFICIT


             0.0                                                                                                                                          115.0
                    1995   1996   1997      1998         1999          2000       2001          2002          2003         2004      2005   2006   2007



             -1.0                                                                                                                                         110.0




             -2.0                                                                                                                                         105.0




             -3.0                                                                                                                                         100.0




             -4.0                                                                                                                                         95.0




             -5.0                                                                                                                                         90.0




             -6.0                                                                                                                                         85.0




             -7.0                                                                                                                                         80.0

                                             CURRENT ACCOUNT/GDP (%; left axis)          REAL EFFECTIVE EXCHANGE RATE (right axis)
                                                                                                                                                                  24
        3. “Irresponsible” monetary policy by the Fed
 Moreover,    perhaps the great moderation of inflation of the
  last 15 years depends more on globalization (with
  production being relocated to lower cost of labor countries)
  than on the Central Banks’ credibility and the rigor of their
  monetary policies
 It is useful to recall that:
    i) during the first globalization of the 1800s developed
      countries experienced a drop in their price level – 1.4%
      per year between 1865 and 1900 in the US – and not
      simply a lower increase in prices, i.e. a moderation of
      inflation
    ii) then the international monetary system, based on the
      gold standard, ruled out discretionary monetary
      policy
 i) & ii) together lead to doubt that, effectively, the
  discretionary monetary policies of the main Central
  Banks have been fundamental to lower inflation in the
  recent phase
                                                           25
         3. “Irresponsible” monetary policy by the Fed
   We need to enlarge the focus of monetary policy with
    Central Banks not merely aiming at inflation while big
    imbalances grow
   This takes us back to the mistakes made by the Fed who
    kept too low interest rates for too long while the US
    were cumulating their external debt
   Furthermore, salvaging the LTCM hedge fund (in 1998)
    and lowering rates decidedly after the burst of the new
    economy bubble (in 2000), the Fed had heightened
    moral hazard for financial intermediaries, to the point
    that pundits described a kind of “Greenspan put”, i.e. an
    option with which if things went well they cashed in the
    profits and if things went awry the Fed would come to their
    rescue lowering interest rates
   All in all, those stabilization policies were destabilizing
    because they were founded on theoretical mistakes

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